XYZ Company makes 14,000 units per year of a part it uses in the products it man

Question

XYZ Company makes 14,000 units per year of a part it uses in the products it manufactur product cost of this part is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost $12.60 20.20 2.40 10.30 $ 45.50 An outside supplier has offered to sell the company all of these parts it needs for $41.70 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product wouk be $72,800 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $5.80 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products Required 1. How much of the unit product cost is relevant in the decision of whether to make or buy the part? 2. Compute the total relevant cost to make the part and the total relevant cost to buy the part. Which option do you recommend? Support your answer with computations.

Explanation / Answer

Req 1. Relevant Unit Variable cost: Direct material 12.6 Dirrect Labour 20.2 Variable OH 2.4 Unit Product cost relevant 35.2 Req 2: Incremental analysis of Buying the product: Making Buying Net Income Increase (Decrease) Material cost 176400 0 176400 Labour cost 282800 0 282800 Variable OH 33600 0 33600 Cost of Buying 0 583800 -583800 Contribution margin earned 0 -72800 72800 Total 492800 511000 -18200 Total relevant cost of making: $ 492800 Total relevant cost of buying: $ 511000 Net decreasse in income: ($18200) Hence, the company must make the product.

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